The FDR Framework is the backbone for a 21st century financial system. Under this framework, governments ensure that every market participant has access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to analyze this data because they are responsible for all gains and losses.

Sunday, July 14, 2013

Yet another bank hides behind opacity to mislead investors

A recurring theme since the beginning of the financial crisis has been how banks have hid their true financial condition behind a veil of opacity and used this to take advantage of other market participants.

These participants include, but are not limited to, taxpayers and central bankers through bailouts (see Anglo Irish), depositors who were mis-sold investments (see Bankia and the other Spanish cajas) and investors.

The Telegraph reports how the Co-op bank mis-led pensioners about its true financial condition.

In emails seen by The Sunday Telegraph, a manager at the Co-op Bank told a worried pensioner that “there is no need to be concerned” about a £50,000 investment. The email was sent on May 13, just three days after the ratings agency Moody’s downgraded the bank to “junk” .

The following month, the Co-op suspended interest payments to pensioners and told savers they faced losses of at least 40pc on their investments. The bank also said it had a £1.5bn capital shortfall.

The pensioner wrote: “I am a member of the Co-operative Group and my wife and I ... are extremely fearful that we are about to lose all of this very important retirement savings nest-egg, the income from which we rely upon. We are very, very worried.”

The manager replied: “There is no need for you to be concerned. We do acknowledge the need to strengthen our capital position ... and we have a clear plan to drive this forward. I hope this provides some reassurance.”

At that point, the bank was in discussions with the regulator about the size of its capital shortfall. A month later it revealed it needed £1.5bn, £500m of which was to come from enforcing losses on bondholders.

Including large investors, the bondholders have £1.3bn of debt, £65m of which is with 15,000 pensioners and small savers.

One of the primary reasons for requiring the banks to provide transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details is to end bankers mis-leading anyone about their current financial condition.

About this blog

A blog on all things about Wall Street, global finance and any attempt to regulate it. In short, the future of banking and the global financial system.

This blog will be used to discuss and debate issues not just for specialists, but for anyone who cares about creating good policies in these areas.

At the heart of this blog is the FDR Framework which uses 21st century information technology to combine a philosophy of disclosure with the practice of caveat emptor (buyer beware).

Under the FDR Framework, governments are responsible for ensuring that all market participants have access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to use this data because under caveat emptor they are responsible for all gains and losses on their investments; in short, Trust but Verify.

This blog uses the FDR Framework to explain the cause of the financial crisis and to evaluate financial reforms like the ABS Data Warehouse.